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How to Calculate Fair Market Value of an Immovable Property

From Financial Year 2017-18 onwards, to determine the Capital Gain/loss on sale of an immovable property like house, which was purchased before 1st April 2001, the fair market value of the property as on 1st April 2001 can be taken as its cost of acquisition (purchase cost) at the option of assessee and indexation will be done accordingly.

Since the base year for calculation of Long Term Capital Gain/Loss on sale of a Capital Asset is shifted to year 2001, determination of Fair Market Value on April 2001 of the property being sold has become very important.

Shifting of Base Year - Impact

It simply means that the purchase value of a capital asset purchased before the base year ie-April 2001, can be replaced by its Fair Market Value on April 2001 at the option of the assessee. So if the taxpayer takes Fair Market Value on April 2001, the Capital Gain on sale of a property purchased before April 2001 will be calculated as follows-

Sale Price                                                                            XXXXXX
Less Indexed cost of Fair Market Value on 1st April 2001   XXXXXX

Capital Gain/Loss                                                                 XXXXX

Shifting of the base year from April 1981 to April 2001 is a welcome move and it should reduce the capital gains tax burden on the assessees. In maximum cases Fair Market Value of the property on April 2001 will be higher then actual purchase cost of the property and thus it will result in lesser capital gain. Along with some expected tax relief, now there is an additional task of finding out the Fair Market Value of the property  being sold.

We have tried to figure out here all the possible options and their pros cons; to calculate the Fair Market Value of a Capital Asset purchased before April 2001.

Fair Market Value as Defined in Income Tax Act:

Lets first go inside the Income Tax Act. According to the defining provisions under Section 2(22B) of the Income Tax Act, Fair Market Value of a capital asset is defined as:
  • The price that can be raised from the sale of the capital asset in the open market on the relevant date ie. 1st April 2001. In simple words we can say that the sale price of the asset on April 1st, 2001 should be the fair market value.
  • When the sale price of the asset on the desired date is unascertainable, fair market value shall be detrmined according the the rules made under Income Tax Act.
So, what needs to be done if the sale price of property is not easily asecrtainable?

Its actually very much possible that you are not able to find out the sale price of the property; as its about the time which can be 15 or more years back. Going back to year 2001 and finding the sale value at that time can be tricky.

No Specific Guideline in Income Tax Act:

As there are no specific guidelines prescribed under the Income Tax Act to determine the Fair Market Value of a capital Asset when sale price is unascertainable or even if the sale price can be ascertained what should be taken as fair market value. So finding out Fair Market Value on April 2001 is more like a guess work.

Methods to Calculate Fair Market Value of the Property:

The most practical, seemingly correct and legally acceptable methodologies to determine Fair Market Value(FMV) should be:
  • Actual sale price of similar properties
Actual sale price of a similar property in neighbourhood during the desired time period can make you find out the Fair Market Value. The point to take care here is never try to take a price which is impractical. A price which can not be otherwise justified may not be accepted by tax authorities.
  • Stamp Duty Valuation or Circle Rate of the property
Stamp duty Valuation of the property is an accepatable and genuine way to determine the Fair Market Value. However as circle rates are generally much lower than the prevailing market price of the property, the Fair Market Value on the basis of circle rates is generally lesser than actual sale price of the property. This option though acceptable to authorities may result in higher capital gains.
  • Valuation of the property Through Registered Valuer
Valuation of the property through Registered Valuers is legally acceptable and should bring out a Fair Price. Registered valuers calculate the Fair Market Value considering all the aspects of the property and their reports are legally admissible too. 
Note: Taking Fair Market Value on 1st April 2001 as the cost of acquisition of the property is a choice. if the assessee wants he can take the actual cost of the property instead of Fair Market Value on April 2001 for calculating Capital Gain/loss on sale.

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Quick Links:

Complete list of Cost Inflation Index

How to Calculate Indexed Cost of Acquisition

Capital Gain on Sale of House Property

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